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Starting insolvency proceedings – what you need to know

Whether you are looking to start insolvency proceedings or have received a statutory demand, here we explain the essential information you need to know.

If you want legal advice on insolvency proceedings, please contact our specialist team.

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Otherwise, find out more about the various aspects of starting insolvency proceedings in our guide below:

What is a statutory demand?

A statutory demand is a written demand for payment of a debt and is often used as a precursor to commencing insolvency proceedings.

A creditor may serve a statutory demand on either an individual or a company (known as a debtor), where there is an undisputed and unsecured outstanding sum of money, such as an invoice, for which they have not been paid.

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On whom can a statutory demand be served?

A creditor can serve a statutory demand on an individual where the debt outstanding is for £5,000 or more. In comparison, a creditor can serve a statutory demand on a company where the debt outstanding is for £750 or more.

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How should a statutory demand be served?

When drafting a statutory demand, it is vital that it complies with legal requirements and contains complete details relating to the outstanding debt.

Unlike a claim form, a statutory demand is not a court document and therefore, has its own rules for service.

Generally, where the debtor is an individual, the statutory demand should be personally served and the creditor needs to do all that is reasonable to bring the statutory demand to the debtor’s attention. This is normally done via a process server to ensure personal service of the statutory demand on the debtor.

Alternatively, a statutory demand should normally be served on a company by leaving it at the company’s registered address or by transmission by first class post to the company’s registered office. Proof of receipt of the statutory demand is important.

Once a statutory demand has been served on the debtor, the debtor then has 21 days to comply with the statutory demand. If no action is taken by the debtor within this period, a creditor may file a bankruptcy petition or a winding up petition to commence insolvency proceedings.

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What should creditors consider before filing a petition for insolvency?

Before commencing insolvency proceedings, a creditor should think about the following:

  1. Has the debt been reduced to below the thresholds mentioned above?
  2. Is there a genuine dispute or counterclaim to the debt claim either in part or full?
  3. Is there some other valid reason for not paying the debt?
  4. Has an application been made to set the statutory demand aside or has an application been made by the company to restrain presentation of a petition?

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Commencing insolvency proceedings

Once 21 days have passed after service of the statutory demand and no opposition has been expressed to it, a petition can be filed at court and served on the individual or corporate debtor.

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Bankruptcy petition (where the debtor is an individual)

As with a Statutory Demand, a bankruptcy petition must comply with relevant rules in order for it to be valid and effective. Some issues to consider are:

  • identification of the debtor and details of the debt
  • any reasons for delay in pursuing the debt

Once the bankruptcy petition has been drafted, it can then be filed at the appropriate court – the selection of the court at the outset is important to avoid any undue delay – with the necessary documents and court fee. It is important to procure clear proof of service. The court fee to accompany a bankruptcy petition is in excess of £1,250.

Before filing a bankruptcy petition, a central index search must be carried out to check if a petition has already been filed by another creditor. The court will then fix a hearing date usually around 6-8 weeks away and provide sealed copies of the petition for transmission and service on the debtor within the prescribed timelines. Where service proves difficult, alternative service methods can be used with the permission of the court.

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Winding up petitions (where the debtor is a company)

As with bankruptcy petitions, a winding up petition must comply with the relevant rules.
Some issues to bear in mind are:

  • details of the creditor, debtor and the court
  • the grounds on which the petition is sought.

Once the winding up petition has been drafted, it can be filed at the relevant court with the supporting documents, including proof of service and payment of the appropriate court fee, currently set at around £1,900.

Once the fee has been paid and the petition has been filed, the court will provide sealed copies of the petition and set a hearing date for the petition to be heard.

The sealed petition will then need to be served on the corporate debtor in accordance with the prescribed rules. Clear evidence of service will be required for consideration at the hearing. Unlike bankruptcy petitions, a notice of the winding up petition will need to be advertised in the Gazette. This enables other creditors to register their interest in the petition, either by expressing their support or opposition. There are rules governing the timing of publication by reference to the service and hearing dates which we can assist with. There is also a relatively small fee to be paid.

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Corporate Insolvency and Governance Act 2020

On 25 June 2020, the Corporate Insolvency Governance Act 2020 (“CIGA”) received royal assent and introduced measures to relieve the burden on businesses during the Covid-19 outbreak and to allow them to focus efforts on continuing to trade.

Although, the measures were initially due to be in place until 30 September 2020, the Government has since extended various deadlines. Please see our separate blog which sets out some of the extensions.

CIGA introduced a blanket ban on the use of statutory demands as a tool to commence winding-up proceedings. In line with the above regulations, statutory demands served between 1 March 2020 and 31 March 2021 cannot form the basis of a winding-up petition presented at any point after 27 April 2020.

Whilst statutory demands cannot form the basis of a winding-up petition during this period, there is currently no blanket ban on presenting winding-up petitions where no Statutory Demand is required.

Creditors should note however, if a winding-up petition is filed with the court and the court determines that Covid-19 has had a financial impact on the company (which will need to be argued in court), the petition will be dismissed. It is, therefore, crucial that creditors are satisfied that (a) Covid-19 has not had a financial impact on the debtor company; or (b) the debtor company would have been unable to pay its debts regardless of Covid-19, before presenting a winding-up petition.

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Contact us If you would like advice on or assistance with issuing or defending a statutory demand, or issuing or defending a petition (as an individual or company) , please get in touch with our experienced Dispute Resolution team which specialises in advising creditors and debtors in relation to both personal and corporate insolvency proceedings.